By Ray Birch
PETERBOROUGH, N.H.—The $30-billion settlement between Visa and Mastercard and a group of U.S. retailers is just another “jab” to the face of issuers, especially smaller ones, according to Tim Kolk, who said he doesn’t see any “plus signs” in the card space these days.
“This settlement, while not earth shattering, is just one more thing credit unions are going to have to deal with,” said Kolk, principal at TRK Advisors. “It’s going to be tricky for them.”
Examining the numbers, the average interchange rate is going to come down by seven basis points, as part of the agreement, said Kolk.
As CUToday.info reported here, under the terms of the settlement, Visa and Mastercard will cap the credit interchange fees into 2030 and the companies must negotiate the fees with merchant buying groups.
The settlement is part of a lawsuit originally filed in 2005 that alleged that merchants paid excessive fees to accept Visa and Mastercard credit cards, and that Visa and Mastercard and their member banks acted in violation of antitrust laws.
Kolk said it is uncertain which products and which categories will be affected the most by the new interchange cap.
A Big Unknown
“It is unknown how Visa and Mastercard will nuance it. But let's just take that seven-basis-points (interchange reduction) at face value,” he said. “For an average credit union that seven-basis-point reduction will cut maybe 20 basis points off their bottom line, depending on how much spend they have. And this is competitive environment, it is harder and harder for most credit unions to be profitable—particularly federal credit unions—in their card programs. Losing another 20 basis points is not a lot of fun.”
Tim Kolk
The new settlement will not change the viability of any issuer’s the business overnight, emphasized Kolk.
“But you lose 20 BPs there. You lose another 100 basis points on yield, because you have an 18% rate cap. You'll lose another 30-50 basis points because expenses go up. You lose another 10 because you’ve got to promote your reward card a little more than you used to,” he said. “All these things are moving in the troubling direction.”
The Trickle-Down Effect
Kolk also recognized the impact of the new CFPB credit card late fee rule that experts have stated will trickle down to all issuers, not just those with more than one million active accounts.
“The numbers differ by each credit union, how much each of these brings things down. But I know this, none of them have a plus sign in front of them,” Kolk said.
The settlement is just another little “beatdown,” another “knock in the head,” he said.
“It's not so much a right hook as it is a jab. But it’s been jab, jab, jab all day long for card issuers lately,” reiterated Kolk.
‘The Little Guys Never Win’
Kolk further observed there are the “unknown strategic pieces” related to how merchants now have more flexibility in pricing preference.
The settlement will allow merchants to adjust prices based on costs related to different cards, with the merchants also able to inform customers why their card costs more to use.
“Merchants are going to have flexibility on which cards they will treat in which way they want. They don’t have ability right now,” Kolk noted. “They can create differential pricing on each purchase, and it's going to be really complicated. I am not sure how this will manifest, technically. But I do know that when groups like the big merchant coalitions and the big banks that dominate the card space can now negotiate deals between them individually, and they can create differential price points for payment processing or transacting, the little guys never win.”
He said the smaller issuers lose because they don’t have the scale to negotiate better deals.
A Potential Move by Chase
“This is a little different than the immediate interchange revenue hit that would result. But what if Chase, the biggest merchant processor in the country, bundles up some agreements with its merchant clients to preference Chase credit cards in the pricing structure? Now you got something that's going to help Chase at the cost of other people,” Kolk said. “If Chase can negotiate a preferential payment agreement with a coalition of merchants, that's not something that is in everyone’s favor. All the big banks are going to be working this.”